Chapter 4

Trustees’ powers

Powers of distribution to beneficiaries

P12 New legislation should include a provision to replace section 40 that gives trustees the power to pay out the income of any vested or contingent entitlement to or for a minor beneficiary for the beneficiary’s maintenance, education, advancement or benefit that re-enacts the current provision, with the following reforms:

(a)define the phrase “maintenance, education, advancement or benefit” in the legislation in a way that ensures they are interpreted broadly and include the concepts of “comfort” and “wellbeing”;(b)remove the current test for the exercise of power, “as may, in all the circumstances, be reasonable” (c)remove the requirement to take into account other trust funds to which a beneficiary may have access; and(d)reduce the age of majority in the provision to 18 years old.

P13 New legislation should include a provision to replace section 41 that gives trustees the power to pay out the capital of any vested or contingent entitlement to or for a beneficiary for the beneficiary’s maintenance, education, advancement or benefit that re-enacts the current provision, with the following reforms:

(a)define the phrase “maintenance, education, advancement or benefit” as in P12 above;(b)remove the limits on the amount of the advancement (currently limited to the greater of $7,500 or half of that beneficiary’s total entitlement); and(c)clarify that those who hold contingent interests under a double contingency are not eligible.

Please give us your views on these proposals.

Current law

4.15Sections 40 and 41 are important sections that empower trustees in private trusts to distribute to beneficiaries outside of the explicit distribution requirements in a trust deed for the beneficiary’s advancement, education, maintenance or benefit. The sections are detailed and include a number of restrictions on how these powers must be exercised.

Issues

4.16The sections are long-winded and overly complex. Their language is in need of modernisation. We have particularly considered whether the wording “maintenance, education, advancement or benefit” needs to be updated.

4.17Some of the restrictions on how these powers may be exercised are now considered too limiting and many trust deeds override these powers with powers that are less restrictive. Section 40 requires the trustee to apply an objective “reasonableness” test and to consider other trust funds that may provide for a beneficiary in exercising the discretion to pay the beneficiary income. Section 41 limits the amount that may be advanced to a beneficiary to the greater of $7,500 or half of the beneficiary’s total share and requires the consent of a life tenant if capital is going to be paid out. The NZLS commented that section 41 does not make it clear that those who hold contingent interests under a double contingency are not eligible for an advance, but case law has shown this to be the case.

Discussion

4.18The terms “maintenance” and “advancement” may be somewhat out of date, but we are of the view that the best approach is to retain the current wording to describe the purposes for which payments may be made under sections 40 and 41. Nearly all submitters wanted the terms retained because their meaning is settled and a change could bring unnecessary uncertainty. The courts have interpreted these terms broadly to encompass payments that enhance a beneficiary’s comfort and wellbeing. We propose that this broad approach can be made clear in the new legislation by defining the terms to include these wider concepts.

4.19The NZLS commented that the mix of a subjective test (“at his sole discretion”) and an objective test (“as may, in the circumstances, be reasonable”) in section 40(a)(1) results in confusion and is difficult for trustees to apply. We agree that the objective test unhelpfully limits trustees’ discretion and should be removed. This is in line with our general proposed approach to trustees’ powers of removing restrictions in the default provisions and relying on clear trustees’ duties to regulate the exercise of trustees’ powers.

4.20The same principle applies to the requirement in the proviso to section 40(1) that where the trustee has notice of another trust fund from which a minor beneficiary may benefit, the trustee should apportion the payment to this beneficiary accordingly. The NZLS also questioned this restriction. We consider that it should be removed because it is a significant fetter on trustees’ discretion, and is impractical and potentially costly to carry out in practice. It is almost always overridden in trust deeds.

4.21Submitters advised that most trust deeds override the default limits to the amount that may be advanced to a beneficiary under section 41 and nearly all thought the restriction should be removed. The monetary limits are out of date. Including any monetary limit risks the same problem in the future. We consider that giving trustees a broad power regarding the amount that may be advanced, subject to the trustees’ duties of reasonable care and even-handedness, would address any concern that without the limits beneficiaries may suffer because of an erosion of capital. This reform would not be able to apply to existing trust deeds, as settlors of deeds that rely upon the current Act’s default provision intended that these limits apply.

4.22We have considered whether the requirement in section 41 for the court or the life tenant to consent if capital is to be paid out to a beneficiary should also be removed in the interests of reducing the restrictions on trustees’ powers in the default provisions. However, this remains a significant guard against trustees disregarding a life tenant’s interest and acknowledges the life tenant’s property interest in the capital of the trust.

4.23Submitters unanimously supported reducing the age of majority for beneficiaries under section 40 from 20 years to 18 years. We consider it is appropriate to reduce the age to reflect the current social and legal context where 18 year olds are generally considered to have capacity (discussed more fully below).